Thursday, March 30, 2006

Editorial: NZ business like branch of Australia

Another month and another significant listed New Zealand company seems about to fall into Australian hands. This time the takeover target is rubbish disposal firm Waste Management; in February it was Contact Energy. Whatever the merits of these developments for the companies involved, the consequences are regrettable for New Zealand. More and more, its business sector is coming to resemble a branch office of Australia. And more and more, the stock market has the depth of a children's paddling pool.

It should not be happening this way. A long spell of economic buoyancy should have provided the platform for an improved level of public capital-raising and a raft of new listings. A more innovative stock exchange, marshalled by chief executive Mark Weldon, and a higher level of investor protection should also have helped. Instead, the main feature of the past few years has been a swathe of major delistings, thanks to takeovers, sometimes at relatively cheap prices, or privatisations.

To a large degree, New Zealanders can blame themselves. Our unhealthy obsession with residential property denies funding to companies seeking to expand. Rather than acquiring, they become targets for acquisition. Both the stock exchange and the cause of economic growth have paid a price for this inefficient allocation of capital.

Contrast that with Australia, where compulsory superannuation, in particular, provides a funding pool to underpin the expansion of companies, into New Zealand and elsewhere. The consequences are not always benign. The exercise of control from Sydney or Melbourne may mean a loss of jobs here because of the performance of the whole group, not necessarily the operations in New Zealand. Or an Australian company may have rather less interest in sponsoring events here than in its own backyard.

The Government has reacted slowly. The Kiwisaver scheme is a tentative step in the right direction, but even parts of it are tied to home ownership. The stock exchange, for its part, would dearly love to see the concept of a shareholding democracy take flight. This would see mum-and-dad investors owning stakes in fully or partly privatised utility companies. The oversubscription for energy network company Vector last year demonstrated an appetite for strong shareholding opportunities. And that this is a viable means of weaning investment away from housing, and providing the basis for company expansion.

But the shareholding democracy framework remains frail. It is likely, unfortunately, to remain so, given the controversy aroused by such shareholding offers. Furthermore, it should be noted that Contact, one of its shining successes, is now, itself, subject to a takeover offer from Australia. If this is successful, Contact's mum-and-dad investors will find themselves part of a riskier undertaking than that for which they signed up.

Given that the savings culture envisioned by the architects of the Kiwisaver scheme will not happen overnight, there is no reason to suggest the encroachment from Australia is about to ease. Australian companies do need to be careful, however. If their New Zealand operations are seen to be inefficient or indifferent to customers, they open a door. The Government-owned Kiwibank has benefited from a perception that Australian-owned banks charge high fees. In other sectors, there will surely be opportunities for private investors.

Many such endeavours will, of course, seek the backing of New Zealanders' capital. For the sake of economic growth, they must receive it. If the tide sweeping over the country from Australia is to ebb, our investment habits will have to change substantially.